When it comes to committing money to plants and equipment and making other kinds of business investments in the U.S., what drives manufacturing executives' decisions? The answer, first and foremost, is cash flow, say senior financial executives among the 450 companies belonging to the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group. Cash flow generally is a company's net income after taxes plus such charges against income as depreciation.
The 51 executives, whom the alliance surveyed in December 2005, also put expected profits and market growth projections high on their list of factors affecting the level of their U.S. investments. Just a bit farther down on the list are capacity utilization, current profits and labor-cost trends. Least important for this group of executives are commodity price trends, investments by competitors and long-term interest rates.
| Investment Drivers
The Top Five
- Cash flow
- Expected profits
- Projections of market growth
- Capacity utilization rate
- Current profits
Source: Manufacturers Alliance/MAPI |
Other factors affecting investment decisions, mentioned by some executives but not ranked, include the litigious environment in the U.S. and the country's relatively high corporate tax rate.
A 78% majority of executives indicated their companies plan to increase investment in the U.S. this year, with an average projected increase of 18.3%. Eight executives said their companies plan to cut U.S. investment in 2006, with an average decrease of 22.8%.
"Most respondents said that cash flows and profits increased significantly in 2005 and will rise in 2006 -- although the percentage increases will be smaller," relates an unsurprised Donald A. Norman, the alliance economist who oversaw the survey of executives. "With the transition from a recovery phase to normal expansion, the percentage gains in profits and cash flows would be expected to moderate," he says.
